Macatawa Bank(MCBC) - 2022 Q4 - Annual Report

PART I Business Macatawa Bank Corporation is a bank holding company with $2.91 billion in assets, focusing on commercial and consumer banking in western Michigan Key Financials at Year-End 2022 | Metric | Amount (in billions) | | :--- | :--- | | Total Assets | $2.91 | | Total Loans | $1.18 | | Total Deposits | $2.62 | | Shareholders' Equity | $0.247 | - Net income increased to $34.7 million in 2022 from $29.0 million in 2021, and the company paid a quarterly cash dividend of $0.08 per share throughout both years[15][16] - The company is in an asset-sensitive position, meaning its net interest income benefits from increases in short-term interest rates, as was the case in 2022[18] Nonperforming Assets (2020-2022) | (Dollars in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Nonperforming loans | $78 | $92 | $533 | | Other real estate owned | $2,343 | $2,343 | $2,537 | | Total nonperforming assets | $2,421 | $2,435 | $3,070 | Products and Services The company provides a range of loan, deposit, securities, and trust services, with a focus on commercial lending Loan Portfolio Composition (December 31) | (Dollars in thousands) | 2022 Amount | 2022 % of Total | 2021 Amount | 2021 % of Total | | :--- | :--- | :--- | :--- | :--- | | Total commercial | $979,319 | 83% | $936,358 | 84% | | Residential mortgage | $139,148 | 12% | $117,800 | 11% | | Consumer | $59,281 | 5% | $54,835 | 5% | | Total loans | $1,177,748 | 100% | $1,108,993 | 100% | Average Deposit Balances and Rates | (Dollars in thousands) | 2022 Avg. Amount | 2022 Avg. Rate | 2021 Avg. Amount | 2021 Avg. Rate | | :--- | :--- | :--- | :--- | :--- | | Noninterest bearing demand | $884,579 | —% | $885,838 | —% | | Interest bearing demand | $704,926 | 0.14% | $681,411 | 0.03% | | Savings and money market | $879,273 | 0.28% | $822,235 | 0.03% | | Time | $88,218 | 0.40% | $101,353 | 0.49% | | Total deposits | $2,556,996 | 0.15% | $2,490,837 | 0.04% | - Trust Department assets under management totaled approximately $1.007 billion as of December 31, 2022, split between personal trust services ($537.5 million) and retirement plan services ($469.2 million)[62][63] Supervision and Regulation The company and its bank subsidiary are extensively regulated by federal and state authorities and must adhere to Basel III capital requirements - The company is a registered bank holding company regulated by the Federal Reserve Board under the BHCA, while Macatawa Bank is a Michigan-chartered bank regulated by the DIFS and the FDIC[73][83] - The company's ability to pay dividends is indirectly limited by restrictions on the Bank, which are governed by Michigan law and federal regulators like the FDIC[79][91][92] - The Bank is subject to Basel III capital requirements, including a minimum Common Equity Tier 1 (CET1) ratio of 7.0%, and was categorized as "well capitalized" as of December 31, 2022[87][90] Risk Factors The company faces risks from interest rate changes, local economic conditions, real estate loan concentration, and stock price volatility - Changes in interest rates can negatively affect net interest income, the ability to originate loans, and the fair value of financial assets[104] - The company's concentration in western Michigan makes it vulnerable to local economic downturns, which could impact loan repayment, collateral values, and deposit stability[105] - A substantial portion of the loan portfolio consists of real estate-related loans, with commercial real estate loans representing 45.7% and residential loans 11.8% of the total portfolio, posing significant concentration risk[112] - The company will adopt the Current Expected Credit Loss (CECL) accounting standard on January 1, 2023, which could increase the allowance for loan losses and add volatility to earnings[109] - Risks associated with the company's stock include price volatility, limited trading liquidity, and anti-takeover provisions that could discourage potential acquisition proposals[140][143][146] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[150] Properties The company owns or leases 29 facilities, including its main office and 26 branches, primarily in western Michigan - The company's administrative offices are located at 10753 Macatawa Drive, Holland, Michigan and it operates a network of owned and leased facilities, including 26 branch offices[151][14] Legal Proceedings The company is not party to any material pending legal proceedings outside of routine litigation - There were no material pending legal proceedings, other than routine litigation incidental to the business of banking[152] Mine Safety Disclosures This section is not applicable to the company - Not applicable[153] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock (MCBC) trades on Nasdaq, with a quarterly dividend of $0.08 per share declared throughout 2022 Quarterly Stock Price and Dividends (2022) | Quarter | High | Low | Dividends Declared | | :--- | :--- | :--- | :--- | | First | $9.56 | $8.76 | $0.08 | | Second | $9.31 | $8.38 | $0.08 | | Third | $10.28 | $8.65 | $0.08 | | Fourth | $11.84 | $9.21 | $0.08 | - The company's stock performance in 2022, with dividends reinvested, resulted in a cumulative total return of 29.35% since the end of 2017[159] - In Q4 2022, the company purchased 15,246 shares at an average price of $11.30 per share related to employee stock compensation plans, with no publicly announced repurchase programs[160][162] [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Results of Operations and Financial Condition Net income rose to $34.7 million in 2022, driven by higher net interest income from rising rates, while total assets remained stable at $2.91 billion Financial Performance Summary (2021 vs. 2022) | (Dollars in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $70,146 | $56,069 | | Provision for Loan Losses | $(1,125) | $(2,050) | | Total Noninterest Income | $20,019 | $23,695 | | Total Noninterest Expense | $48,226 | $46,090 | | Net Income | $34,731 | $29,014 | - The increase in net interest income was primarily due to a 54 basis point increase in the yield on earning assets, driven by the 425 basis point rise in the federal funds rate[172][174] - Noninterest income decreased mainly due to a $4.0 million drop in net gains on mortgage loans, as rising interest rates significantly reduced mortgage origination and sale volumes[185][186] - Total assets decreased slightly by $21.8 million to $2.91 billion, as the company deployed $396.6 million of cash into loans and securities[199][201][202] Results of Operations Net income increased 19.7% to $34.7 million in 2022, driven by a 25% rise in net interest income from higher rates Net Interest Income Change Analysis (2022 vs 2021) | (Dollars in thousands) | Increase (Decrease) Due to Volume | Increase (Decrease) Due to Rate | Total Change | | :--- | :--- | :--- | :--- | | Total interest income | $1,172 | $15,100 | $16,272 | | Total interest expense | $(830) | $3,025 | $2,195 | | Net interest income | $2,002 | $12,075 | $14,077 | - Net gains on mortgage loans fell from $4.7 million in 2021 to $706,000 in 2022, as mortgage loans originated for sale dropped significantly due to the rising rate environment[185][186][211] - Salaries and benefits expense, the largest component of noninterest expense, increased by nearly $1.0 million to $26.2 million in 2022[193] Financial Condition Total assets were stable at $2.91 billion, with a significant shift from cash into higher-yielding securities and loans while maintaining strong asset quality - Total portfolio loans increased by $68.8 million to $1.18 billion; excluding PPP loan forgiveness, underlying loan growth was robust, particularly in the commercial portfolio which grew by $84.9 million[204][205] - Nonperforming assets remained stable and low at $2.4 million, representing 0.08% of total assets at year-end 2022 and 2021[216][220] - The allowance for loan losses decreased by $604,000 to $15.3 million, with the allowance as a percentage of total loans declining to 1.30% from 1.43%[224] - Shareholders' equity decreased by $7.0 million to $247.0 million, as net income was more than offset by dividends and a $31.3 million negative impact from unrealized losses on securities[200][253] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, and its asset-sensitive position would benefit from a gradual rate increase Interest Rate Sensitivity Analysis (as of Dec 31, 2022) | Interest Rate Scenario | Net Interest Income % Change | Economic Value of Equity % Change | | :--- | :--- | :--- | | Up 200 bps | +3.78% | -2.88% | | Up 100 bps | +1.89% | -1.33% | | Down 100 bps | -2.27% | -0.06% | | Down 200 bps | -6.38% | -5.81% | Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's unqualified opinion - The independent auditor, BDO USA, LLP, issued an unqualified opinion on the consolidated financial statements, stating they present fairly the financial position and results of operations[282] - The auditor identified the qualitative environmental factors used in determining the Allowance for Loan Losses as a critical audit matter due to the highly subjective judgments involved[287][289] Notes to Consolidated Financial Statements The notes detail accounting policies, the upcoming adoption of CECL, and provide breakdowns of key financial statement accounts - The company will adopt the CECL accounting standard on January 1, 2023, and estimates it will result in an allowance increase of $1.2 million to $2.2 million[362] - On January 1, 2022, the company transferred U.S. Treasury securities with an amortized cost of $123.5 million from 'available for sale' to 'held to maturity'[372] Regulatory Capital Ratios (Consolidated) | Ratio | Dec 31, 2022 | Dec 31, 2021 | Minimum w/ Buffer | | :--- | :--- | :--- | :--- | | CET1 capital ratio | 16.9% | 17.2% | 7.0% | | Tier 1 capital ratio | 16.9% | 17.2% | 8.5% | | Total capital ratio | 17.9% | 18.3% | 10.5% | | Tier 1 leverage ratio | 9.7% | 8.7% | 4.0% | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None reported[469] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[470] - Based on the COSO criteria, management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022[474] Other Information There is no other information to report in this section - None[484] PART III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement Executive Compensation Information is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise | Securities remaining available for future issuance | | :--- | :--- | :--- | | Approved by security holders | 0 | 973,550 | | Not approved by security holders | 0 | 0 | | Total | 0 | 973,550 | Certain Relationships and Related Transactions, and Director Independence Information is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement Principal Accountant Fees and Services Information is incorporated by reference from the company's 2023 Annual Meeting Proxy Statement PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report Form 10-K Summary No Form 10-K summary is provided - None[498]